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High-Speed Rail: Public, Private or Both? Assessing the Prospects, Promise and Pitfalls of Public-Private Partnerships High-Speed Rail: Public, Private or Both? Assessing the Prospects, Promise and Pitfalls of Public-Private Partnerships U.S. PIRG Education Fund Tony Dutzik and Jordan Schneider, Frontier Group Phineas Baxandall, U.S. PIRG Education Fund Summer 2011 Acknowledgments The authors thank Michael Likosky, senior fellow at the Institute for Public Knowledge at New York University, Elliot Sclar, professor of urban planning at Columbia University, and Yonah Freemark of the Transport Politic for their review of this report. Thanks also to Carolyn Kramer for her editorial assistance. U.S. PIRG Education Fund thanks the Rockefeller Foundation and the Ford Foundation for making this report possible. The authors bear responsibility for any factual errors. The recommendations are those of U.S. PIRG Education Fund. The views expressed in this report are those of the authors and do not necessarily reflect the views of our funders or those who provided review. Copyright 2011 U.S. PIRG Education Fund With public debate around important issues often dominated by special interests pursuing their own narrow agendas, U.S. PIRG Education Fund offers an independent voice that works on behalf of the public interest. U.S. PIRG Education Fund, a 501(c)(3) organiza- tion, works to protect consumers and promote good government. We investigate problems, craft solutions, educate the public, and offer Americans meaningful opportunities for civic participation. For more information about U.S.PIRG Education Fund or for additional copies of this report, please visit www.uspirg.org/edfund. Frontier Group conducts independent research and policy analysis to support a cleaner, healthier and more democratic society. Our mission is to inject accurate information and compelling ideas into public policy debates at the local, state and federal levels. For more information about Frontier Group, please visit www.frontiergroup.org. Design: Harriet Eckstein Graphic Design Cover photo illustration: Renfe Operadora, Dirección de Comunicación, Marca y Publicidad Table of Contents Executive Summary 1 Introduction 5 Public-Private Partnerships: What They Are and Why They Matter 6 Public-Private Partnerships and their Role in High-Speed Rail 6 Models of Public-Private Partnerships 9 The Pros and Cons of Public-Private Partnerships 15 Potential Benefits of PPPs 15 Potential Problems of PPPs 17 Evaluating the Experience Abroad 21 Protecting the Public Interest: Principles for High-Speed Rail PPPs 30 1: Governments Must Only Pursue PPPs for the “Right” Reasons 30 2: PPPs Must Deliver Identifiable Added Value 31 3. PPP Contracts Must Align Private Sector Incentives with Public Sector Goals 31 4. PPPs Must Only Be Pursued in an Atmosphere of Competition 32 5. PPPs Must Only Be Pursued by Capable and Prepared Governments 32 6. There Must Be Clear Accountability in PPP Projects 33 7. The Public Must Retain Control over Key Transportation-System Decisions 33 8. PPP Contracts Must not Impose Unreasonable Limitations on Future Government Action 34 9. PPP Contracts Should Be of Reasonable Length 34 10. PPPs Must Be Subject to Extraordinary Transparency 35 When Do PPPs Make Sense? 35 Are PPPs Really Worth It? 35 Notes 37 Executive Summary rivate sector companies are likely to Public-private partnerships will play a major role in the construction likely be part of the development of Pof high-speed rail lines in the United high-speed rail in the United States. States. Even as California nears construc- tion of the nation’s first high-speed rail • High-speed rail systems require bil- line, however, it remains unclear just lions of dollars in financial capital, how the private sector will participate in which cash-strapped state and fed- building out the nation’s high-speed rail eral governments are likely to seek network. through partnerships with the private Public-private partnerships—or sector. “PPPs”—have come to play an important role in the construction of high-speed rail • California is moving forward with the lines around the world. In a PPP, the public creation of the nation’s first true high- and private sectors are supposed to share speed rail system, and it is required the risks, responsibilities and rewards of by ballot initiative to obtain private infrastructure development. investment in the project. The experience with high-speed rail PPPs around the world, however, has been • Amtrak is seeking to involve private mixed. While PPP arrangements have investors in its plan to bring true brought private capital and expertise to the high-speed rail service to the busy task of building high-speed rail, PPPs have Northeast Corridor. also resulted in cost overruns, government bailouts, and other serious problems for • The U.S. Department of Transporta- the public. tion has signaled that private invest- America must learn from these experi- ment will play a key role in achieving ences and pursue PPPs only in situations in President Obama’s goal of linking which they make sense—and do so in keep- 80 percent of the U.S. population via ing with a series of key principles designed high-speed rail by 2035. to protect the public interest. Executive Summary All high-speed rail public-private result in important transportation as- partnerships require substantial public sets being operated primarily to boost investment. private profit rather than best advance public needs. • No modern high-speed rail line has ever been built with only private • Delays in the early stages of a project, capital. In several recent and current as government and private partners European high-speed rail PPPs, the engage in the difficult and complex public sector has been responsible for task of negotiating PPP agreements. more than half the capital cost of the high-speed rail line. High-speed rail PPPs and efforts toward rail privatization abroad have a No two public-private partnerships mixed track record. are alike. • In Taiwan, the government’s efforts • There are countless varieties of high- to pursue a fully private-sector built speed rail PPPs, meaning that each and financed high-speed rail line fell such partnership is unique and must apart—despite rising ridership—as be evaluated on its own terms. the private company responsible for building the line faced a financial Public-private rail partnerships have crisis caused by its reliance on high- the potential to unlock access to private cost debt. The Taiwan government capital, expertise, technology and econo- ultimately stepped forward to bail out mies of scale, and can also help mitigate the company and refinance its debt. the risk of high-speed rail projects to taxpayers. However, PPPs also come with • In the Netherlands, a series of prob- a number of risks and costs, including: lems led to massive cost overruns in the construction of a high-speed • Higher costs for capital, as well as rail line, most of which became the costs related to the profits paid to responsibility of the government. The private shareholders. PPP process was characterized by il- legal collusion among bidders for the • Heightened risk for the public once a construction contracts, poor coordi- project has begun, due to the ability nation among the various contracts, of private-sector actors to hold proj- and unexpected delays that required ects hostage and demand increased the government to provide emergency subsidies or other concessions from bailouts. government. • In Great Britain, an effort to priva- • The costs of hiring and retaining the tize the operation of the nation’s lawyers, financial experts and engi- rail infrastructure led to a decline neers needed to protect the public in the system’s safety. Excessive use interest in the negotiation of PPP of contracting, coupled with poorly agreements and to enforce those designed incentives, caused delays in agreements over time. the response to known safety prob- lems and a massive backlog of critical • Loss of control over the operation of maintenance projects—problems that the high-speed rail line, which can contributed to a deadly train accident 2 High-Speed Rail: Public, Private or Both? in 2000. In the wake of that accident, project and effective and safe the formerly private infrastructure operation. provider was reorganized as a govern- ment-regulated non-profit. 4) PPPs must only be pursued where ample competition exists for the • Portugal engaged in thoughtful service being put out for bid. development of a PPP strategy for construction of its high-speed rail sys- 5) PPPs must only be pursued by tem. However, Portugal’s high-speed competent, well-prepared govern- rail program still required a large ments with the ability to defend the investment of public resources and the public interest in contract negotiations nation may be responsible for paying and to properly monitor and enforce financial compensation to its private contracts as they are carried out. sector partners if it pulls back on its high-speed rail construction plans in 6) There must be clear public ac- the midst of a devastating financial countability in PPP projects, with crisis. one government agency responsible for overseeing the project and hold- Public officials should use a set of ing contractors accountable for their common-sense principles to evalu- performance. ate public-private partnerships—and should refuse to pursue PPPs that do 7) The public must retain control over not serve the public interest. key transportation-system deci- The principles that should guide gov- sions, ensuring that high-speed rail ernment’s approach to high-speed rail lines are built and operated in ways PPPs are: that are consistent with the public interest rather than the maximization 1) Governments must only pursue of private profit. PPPs for the “right” reasons, such as the ability to deliver a public project 8) PPP projects must not impose for lower price or with higher qual- unreasonable limitations on fu- ity—rather than use PPPs to avoid ture government action, such as the budgetary discipline or compliance “non-compete” clauses in some toll with labor standards or other regula- road leases that forbid government tions governing public projects.

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